GCIL’s 3QFY18 net profit grew 14% y-o-y to Rs 2,200 crore (adjusted for wage provisioning) despite capitalisation of Rs 6,000 crore (11% y-o-y), due to project commissioning at end-3QFY18. Management guides for FY18 capitalisation to be Rs 28,000-30,000 crore, implying that 4Q would clock Rs 94,000 crore-95,000 crore of project commissioning. Wage provisioning in FY18 of Rs 440 crore is yet to be allowed as a tariff pass-through by CERC and is pending for govt’s approval for wage hike. PGCIL’s capex remained stable at Rs 5,900 crore in 3QFY18, while CWIP fell 14% y-o-y to Rs 33,500 crore. We factor capitalisation to converge with a capex run rate of Rs 25,000 crore-Rs 26,000 crore/year by FY20-21. We maintain our thesis that PGCIL will pass its peak capitalisation in FY18-19, following which transmission earnings growth would taper off. However, given the recent price correction and no change in our estimates/TP, we find its risk-reward to be favourable. We find PGCIL attractive given FY18-20 EPS CAGR of 13%, available at 9x, FY20 earnings (1.4x, FY20 book value). We Upgrade to ‘buy’ while maintaining our TP of Rs 230.
PGCIL reported an adjusted net profit of Rs 2,200 crore, adjusted for provisions for employee wage revision. Employee cost revision is a pass-through under CERC norms and hence we do not find it to be a cause of concern. Core RoE dipped to 16% from a run rate of 17%-18% possibly due to lead-lag in payment of retention money of completed projects, which get added to regulated equity upon actual cash outflow. We believe this will get ironed out over the near term as retention is paid and regulated equity increases. Consultancy income fell 13% y-o-y, offset by telecom revenue growing 34% y-o-y. However, cumulatively these segments account for c.4%-5% of the overall EBIT and hence not very material. Management targets completing its projectsin-hand of Rs 1.03 lakh crore in the next 3-4 years, implying annual capitalisation of Rs 25,000 crore- Rs Maintain ‘buy’ on Power Grid with TP of Rs 23026,000 crore, including 9 tariff-based competitive bidding (TBCB) projects that are under construction and may have lower RoEs due to their competitive nature.